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Draghi’s awkward memory moment: Not the role of ECB to use its monetary policy to force governments to reform

It is a working psychological survival strategy: one creates a bubble, gets in and lives comfortable and nicely till the end of the days. When the bubble is drawn with bright colors, the protection is almost perfect – especially when these bubbles are institutions like the European Central Bank. Too bad that people whose lives have been affected by the Institutions do not share the memory capacity of a gold fish, like Mario Draghi.

In his speech key note speech “How domestic economic strength can prevail over global weakness” at the Deutsche Börse Group New Year’s reception 2016, in Eschborn, Germany, on 25 January 2016, the President of ECB Mario Draghi proved he had an very-short lived memory or is it an odd sense of humor?

Mario Draghi noted among others when speaking about the role of the ECB policy:

“The third concern about our policy is that it takes the pressure off governments to pursue structural reforms. But there are several problems with this argument.

For a start, it doesn’t work institutionally. It’s not the role of the ECB to use its monetary policy to force governments to reform. That’s not our mandate in the Treaty. And frankly, for us to act in that way would be totally illegitimate as unelected central bankers.”

I suppose it was the moment that at least 10 million Greeks bursted into a loud laughter. It was these Greeks, KTG incl, who were covering and reading down to the last detail, the ECB strangulation of the Greek banks during the Government-creditors negotiations in spring 2015. For every Greek B, the ECB would say A and choke to death the liquidity of the Greek banks and forcing Greece to bank holiday and capital controls.

Low interest rates

Draghi spoke also about the concerns on low interest rates and claimed that this benefits the purchase of …cars!

“The first is the perception that low interest rates unfairly punish savers. Low interest rates of course lead to lower returns on safe assets, such as deposits. But what matters for savers is what their assets can actually buy – i.e. real returns – and how their overall portfolios are performing. And it turns out that on this metric, the situation isn’t nearly as bad as it’s often thought to be.

As our colleagues at the Bundesbank have shown [2], the real return on a typical private portfolio for a German household since 2008 has been around 1.5%. That is lower than the pre-crisis average, to be sure. But it’s hardly an “expropriation” of savers. In fact, it’s better than in several repeated periods since the early 1990s.

A related concern is that low interest rates cause people to save more to make up the difference and are therefore self-defeating. But that’s also not quite right. The Bundesbank study I just mentioned shows that just 1% of German households are saving more because of low interest rates. For the vast majority – 77% – those rates have not caused them to adjust their savings behaviour.

What low interest rates are doing, however, is stimulating the economy and especially the demand for durable goods, like cars.”

Mario Draghi’s full speech here.

PS hm… with 7 euro per month profit after 15% taxes from interest rates what does the average Greek do? He buys a car or a super huge plasma TV – according to Draghi, of course.

gold fish memory

it’s a myth that a gold fish has a memory capacity of 3 seconds. The truth is a gold fish can remember something for 12 seconds.

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